Pay Your Mortgage or Invest It

What to do?One of the greatest dilema around for home owners is to assess whether it’s better to invest or pay the mortgage faster. For the past few years, it has been compounded by the low interest rate environment. Considering that home loans from Newcastle Permanent Building Society, known as mortgages, are a necessity for most home owners, the servicing of the debt becomes a daily ritual and an accepted expense for many years. Many forget that in the end, the mortgage loan and interest would usually end up costing twice the value of the original loan. If you take a moment to think about your original loan and you do the math, your eyes must be showing some interesting expression 🙂

Net Worth Assessment Thought

When it comes to net worth, is it better to reduce debt to grow it or to accumulate assets with liabilities? I know there are two school of thoughts here but liabilities can be costly and when it comes to paying down your mortgage or investing, a lot has to do with your school of thoughts.

Mortgage or Invest Scenarios

Let me look at the flip side of the coin for many scenarios below and please take a moment to share your thoughts.

Why Pay Faster When Mortgage Rates Are Low

I heard this comment many times: “The interest rate is low so I don’t need to pay more on my mortgage.” That thought is very shortsighted considering most will have many years remaining on their mortgage. It’s only a matter of time before interest rate go up and then you are back paying through the nose on your mortgage 🙁 When it comes to mortgage interest, it’s important to understand how it’s calculated and interest is paid up front. The lower your mortgage is the less you will pay in future interest when you renew. The best setup for mortgage payment is to pay bi-weekly, it saves time on your mortgage.

I Can Beat My Mortgage Interest Rates

It is very true that in the low mortgage interest rates we currently have that someone can invest with higher returns. The challenge again is that the interest cost on your mortgage is front loaded where as your investment’s compound growth over a long period. Comparing a mortgage rate and an investment yield is not comparing apples to apples. Can you really prove out that your investment is growing faster than the delta in interest payments you would pay over the life of your mortgage? Investment return aren’t guaranteed either and there is nothing to say that while you may be generating some income, the value of your investment may be going down and will fluctuates.

Tax Deductible Scenario

In the US, your interest on  mortgage is tax deductible so the strategy may very well be different. I would love to hear what strategy is standard in the US.

In Canada, many think about making their mortgage tax deductible by implementing the Smith Manoeuvre but it’s not a strategy that reduces debt. It just transfers your debt from non-tax deductible to tax deductible over time.

My Mortgage Payment Strategy

I personally have accelerated paying down my mortgage as it is relatively large. I have done it by increasing my payments based on my annual salary increase 🙂 At some point, I may slow it down depending on the interest rates as it will be easy to calculate my interest cost and compare with my investment.

With that said, I would personally contribute to my TFSA and RESP before making lump sum payments regardless of the interest rates and the same apply to my RRSP since I get a matching contribution from the company.

Readers: Which camp are you in when it comes to paying your mortgage faster or investing?

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